Discretionary fund management and specifically model portfolio services are proving to be increasingly popular amongst many UK advisers.
Firms offering DFM services have traditionally split their proposition between ‘bespoke to individual client’ services and MPS where models serve multiple underlying clients. This article is focusing on MPS.
For advisers, MPS can offer a professionally managed, diversified and risk-aligned set of investment portfolios. The right choice of MPS can help advisers in a number of ways: keeping up to date with regulatory requirements, reducing costs and ultimately improving client outcomes.
As the MPS market has grown, so too has the number of providers and number of model portfolio ranges offered. A plethora of options are now available for advisers to select from.
While less well-populated than the fund universe, advisers can readily access 50 MPS providers or more, with the larger entities now offering active, passive, sustainable and retirement income ranges.
The market is highly competitive, and on the surface it can sometimes appear that many MPS propositions have little to choose between them. Providers have similar looking websites, offer ongoing investment reporting and market commentary, and clear published information such as model portfolio factsheets are now taken as a given.
Widespread platform availability is also now commonplace; it is rare that MPS selection needs to be a function of advisers' preferred platforms.
However, as the market matures and adviser due diligence becomes ever more thorough, we believe a clearer gap will emerge between well-resourced providers and those struggling to keep up. This is because the highest quality MPS management calls for significant resource and scale.
Advisers often focus on a number of well understood due diligence basics. These include easily quantifiable aspects such as scale, often expressed through looking at a minimum level of assets under management, and track record – how the models have performed in different market environments. These will remain important as the MPS market evolves further.
This article looks at some other important aspects that can be overlooked but, one could argue, warrant more attention.
Is the firm’s ownership and business strategy stable?
In tandem with the UK advised sector as a whole, the MPS provider market looks set to consolidate further. High-quality MPS propositions are not cheap to run, fees are under pressure, and financial hurdles such as capital adequacy are leading to market commentators predicting that many smaller DFMs could disappear in the years to come.
Although a future change in ownership is not necessarily a bad thing, history suggests that corporate change is often detrimental for client outcomes. A change in ownership often results in key staff leaving, a drop in focus on serving clients and a change in investment approach at what could be an inopportune moment (perhaps because the business acquirer looks to transition or consolidate portfolios into its own approach.